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As M&A lags, Europe’s PE shops look to leveraged loans, high yield for dividends

The European leveraged finance markets swallowed five new dividend-related transactions totalling €2.24 billion in November, as a lull in M&A activity in the fourth quarter allowed issuers to hit the market with opportunistic transactions.

For much of the year, such dividend-related issuance has not been possible as M&A transactions dominated the primary market. “We’ve just had a six-week period with no M&A, and it’s been the first real opportunistic window we’ve seen this year,” said one market participant. “When the window is there, why would private equity turn down the chance to return money to shareholders and protect its returns?”

europe sponsored loan volume

 

But while there was a small spurt in dividend recap supply in November, the dominance of M&A activity over much of 2018 means the volume of opportunistic recaps seen so far this year has still fallen well behind some previous years.

The loan market has hosted roughly €5.87 billion of dividend activity so far this year while the bond market has taken €1.41 billion, for a total of €7.28 billion, according to LCD. While this is higher than the totals recorded in 2015 and 2016 on this measure (at €3.67 billion and €5.61 billion, respectively), it is still way behind the record-breaking volume racked up in 2017, when the market was dominated by opportunistic activity.

The dividend recaps seen so far in 2018 have resulted in some €2.64 billion being returned to shareholders via the leveraged finance market, which is well below the average of €4.5 billion for the 2006–2017 period. By contrast, in 2017 roughly €8.15 billion was returned to shareholders from the proceeds of deals in the bond and loan markets. — Nina Flitman

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US Leveraged Loan Default Rate Dips to 1.61%

leveraged loan default rate

Despite two fresh triggers from the embattled retail sector, the U.S. loan default rate fell to a 13-month low of 1.61% in November, according to the S&P/LSTA Leveraged Loan Index

The rate, down from 1.92% in October, has declined significantly after hitting a three-year high of 2.42% at the end of the first quarter.

By volume, the total of default debt outstanding slipped to $15.3 billion in November from $18 billion in October, as four issuers—Pacific DrillingExGen Texas PowerCumulus Media, and Walter Investment Management—rolled off the 12-month calculation.

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Amid Broad Market Downshift, US Leveraged Loan Issuance Slows in Nov.

US leveraged loan issuance

Souring market conditions left U.S. leveraged loan issuers in the lurch last month, as issuance cratered to just $21 billion, the lowest monthly level since April 2016 (excluding August and December readings that are subject to seasonal factors).

The market was perhaps due to slow its pace anyway following a $51.4 billion October, which was the third busiest month of the year, according to LCD.

However, market conditions deteriorated in November amid a sharp equity selloff and continued pressure in the high-yield market. Moreover, investors began pulling money out of the asset class at a rate not seen in some time: Outflows from retail loan funds were logged in four of six weeks through Nov. 28 for a cumulative net outflow of $4.4 billion over that span, according to data from Lipper.

Note: This story details loan issuance for institutional investors. Revolving credits and amortizing term loans are not included in the data.

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US Leveraged Loan Funds See $1.32B Outflow

U.S. loan funds reported an outflow of $1.32 billion for the week ended Nov. 28, according to Lipper weekly reporters only. This is the second consecutive week of outflows of more than $1 billion—marking the largest two-week outflow total in three years—and the third outflow in the past five weeks.

Outflows have now been logged in four of the last six weeks for a cumulative net outflow of $4.4 billion over that span. Despite this week’s result, the four-week trailing average narrowed to $721 million, from $768 million, as a large outflow rolled off.

Mutual funds were again the primary driver of the outflow at $992.2 million, while another $328.3 million was pulled from ETFs. This is the fifth straight week that investors have moved cash out of mutual funds, for a total of $3.2 billion during that period.

With this latest outflow, the year-to-date total inflow falls to $7.3 billion.

The change due to market conditions last week was a decrease of $395.8 million, moderating from a steeper decline last week, but still the third straight week in the red. Total assets were roughly $103.8 billion at the end of the observation period and ETFs represent about 11% of that, at roughly $11.7 billion. — Jon Hemingway

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US High Yield Bond Funds Hit With $1.2B Cash Withdrawal

high yield bond flows

U.S. high-yield funds reported an outflow of $1.2 billion for the week ended Nov. 28, according to weekly reporters to Lipper only. This marks the second consecutive negative reading, albeit milder than last week’s $2.2 billion exit.

The net withdrawal was largely the function of ETFs, which registered outflows totaling $719.5 million, while mutual funds recorded a $480.5 million outflow. The four-week trailing average was little changed at $465.9 million, from $426.7 million in the prior week.

This week’s result brings the year-to-date total outflow to roughly $27.7 billion. That is well ahead of 2017’s full-year outflow of roughly $14.9 billion, which stands as the largest exit on an annual basis to date.

The change due to market conditions was an increase of $124.1 million, a reprieve from large declines in the two prior weeks. Total assets at the end of the observation period were roughly $192.3 billion. ETFs account for roughly 21% of the total, at $41.2 billion. — Jon Hemingway

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HPS Prices $405M Strata CLO that will Feature CCC+Debt (and Below)

Citi yesterday priced the $405.3 million Strata CLO I from HPS Investment Partners LLC, according to market sources.

Up to 50% of the portfolio can be invested in assets rated CCC+/Caa1 and below, according to sources. This is the first such transaction from the manager, who has also issued two new issues this year out of its HPS Loan Management platform, and is structurally similar to those issued by Ellington Management.

Pricing details are as follows:

Strata CLO 2018-11-27

The transaction will close on Dec. 20 with the non-call period running until January 2021 and the reinvestment period ending in January 2023. The legal final maturity is in January 2031.

Year-to-date new issuance is now $121.3 billion from 226 CLOs, according to LCD data. November totals are now $11.26 billion from 22 new issues. — Andrew Park

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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.